Who would stay with Woodford?

Nothing illustrates the perils of backing early-stage companies quite as much as the woes surrounding UK-based investment firm Woodford Investment Management – founded by erstwhile star fund manager Neil Woodford – and for some six months the bad news has been piling up to the point where Woodford has found himself forced to backtrack on his commitments to the innovation ecosystem.
If you are catching up, Woodford’s problems had been brewing for a while but the cataclysm began in early June 2019 when the firm had to suspend its Equity Income fund – then worth £3.7bn ($4.6bn), which was down from its peak of £10.2bn, though it has since dropped further to £2.93bn – in the hope of restructuring its balance sheet as a flock of investors sought exits following a series of failed bets.
The Equity Income fund was also facing regulatory pressure to reduce its unquoted exposure to below a 10% mandatory threshold.
Within just a few weeks, Woodford had sold or pared back stakes in 21 companies, including its entire shareholding in Oxford Sciences Innovation (OSI), the university venture fund of University of Oxford, worth nearly $70m at the time.
The decision to abandon OSI in late May, when Woodford was one of the first limited partners of the fund four years ago, cannot have come easily but it was swiftly followed by the firm selling roughly 5% of its shareholding each in commercialisation firms Allied Minds and IP Group in mid-June. By the end of September, Woodford had offloaded its 13.5% stake in IP Group for $94.2m.
Woodford also cut down its shareholding in investment firm Mercia Technologies, a significant backer of British spinouts, from 24.9% to 20% in July.
The volatility of early-stage companies didn’t help: amid all of this came news that the valuation of portfolio company Immunocore, an immunotherapy developer with University of Oxford roots, had crashed by nearly half. Woodford decided to cut its losses by inviting bids for its unlisted biotech investments in mid-July. The firm had already singled out its holding in genetic sequencing technology developer Oxford Nanopore Technologies for a possible sale and got rid of its 20% stake in University of Bristol-founded mid-air haptics technology developer Ultrahaptics in August.
All of this hasn’t just personally impacted Neil Woodford. Susan Searle, the inaugural recipient of a GUV Lifetime Achievement Award in 2013, found herself stepping down from her position as non-executive chairwoman of Mercia, officially to focus on her other commitments – a thinly veiled euphemism for the fact that chaos reigned at Woodford’s other fund, the spinout-focused Patient Capital Trust (WPCT), of which she is chairwoman of the board.
WPCT was worth £800m when it entered the FTSE250 shortly after its launch in 2015, but its net assets have since dropped to £654m, according to the trust’s half-yearly report last week. Shares in the trust once went for £1.19 a pop, but this morning were worth as little as £0.41. It was relegated from the FTSE250 a month ago.
A key issue for WPCT is that about two-thirds of its portfolio overlaps with that of the Equity Income fund and as the latter continues dumping shareholdings that has a knock-on effect on the former’s portfolio value.

WPCT share price in British pence
Searle, who has preferred to communicate through official channels rather than giving press interviews, has been caught out by the scale of issues facing Woodford. In April, she told shareholders that many of WPCT’s portfolio companies were “set to deliver this year” but two weeks ago had to admit that the trust’s most challenging period to date had been “disappointing for everyone,” according to the Times.
Disappointing might be an understatement: WPCT’s first-ever investment, diagnostics company Sphere Medical, fell into administration at the end of September less than three months after Woodford had pumped more capital into the business. Again, it is a portfolio company shared with the Equity Income fund.
WPCT has also been scrambling to extend a loan agreement for more than £111m with Northern Trust, which it used to invest in stocks. The loan is set to mature in January 2020, but after suffering a £232m loss the trust could experience a whole new world of pain if investors decide to withdraw money.
Neil Woodford has so far avoided the humiliation of being ousted but the question of whether he is the right man for the job is looming large. The board has made it clear it is considering its options in removing him but in the meantime is also preparing to convince investors to increase its 80% limit on unlisted holdings because if it cannot gain approval, it is in danger of breaching the limit – it had reached 79.77% by the end of August – and would then no longer be able to make new investments in unquoted companies, also breaching the terms of approximately £11m of commitments already made.
Investors do, however, have motivation not to agree and that reason is, frustratingly, Neil Woodford and the way he has brought trouble to WPCT in order to keep the Equity Income fund afloat. In short, he swapped assets between the two in a transaction worth £78.9m. It helped briefly, but it was the move of a desperate man that has created a bigger mess in the long term.
Finding himself with his back to the wall, Woodford has also had to bend the rules. WPCT’s biggest holding, proton beam therapy developer Rutherford Health, is listed on the NEX stock exchange – a somewhat obscure market aimed at small enterprises – where its shares have only changed hands once since February 2019. Asset management firm Investec has thrown doubts on whether this should count as a listed company for the purposes of Woodford fighting its unquoted exposure, given the apparent lack of the stock’s liquidity.
Of course, the challenge faced by Woodford is that it has to sell unquoted listings and replace them with public companies to make sure the Equity Income fund has the liquidity to withstand investors withdrawing capital en masse when the fund eventually reopens – a goal currently meant to be reached by the end of the year.
All the while, Woodford has continued to collect more than £8m in management fees for the Equity Income fund, adding fuel to the fire that is investors’ anger.
The question, ultimately, is the one posed in this editorial’s headline: who would stay with Woodford? Neil Woodford could have easily been hailed a visionary with his focus on the innovation ecosystem and heartfelt support for British spinouts, but the gamble has failed to pay off simply because there are no safe bets and because it’s only been a few years.
Spinouts remain a highly promising area but this whole saga also shows that the “patient capital” in Woodford Patient Capital Trust is no joke. Investors really do need the staying power to stick around through tough periods because returns won’t come easily or quickly. Such investors do, thankfully, exist. Case in point: investment management company RC Brown has quietly picked up Woodford shares in several ventures at a discount and one of these was none other than IP Group. And OSI was revealed to have added smartphone producer Huawei to its LPs a couple of months before the Woodford saga kicked off.
But Neil Woodford just might not be the captain to steer this ship in rough seas. After all, he is the man who lost £15bn across three funds – his lesser mentioned Income Focus fund has not been doing all too well either – and that is a difficult thing to come back from. Some analysts have made a case for installing a new fund manager with the sole purpose of managing a sell-off and returning whatever money they can to investors.
It would be the end of Woodford Investment Management and, quite possibly, the end of Neil Woodford’s career in finance. It is increasingly likely to happen as hardly a day goes by without new worries adding to Woodford’s headache.
Then again, there have been much more unlikely comeback stories. Aberdeen Standard Investments – then called Aberdeen Asset Management – was embroiled in a major scandal in the early 2000s after making high-risk investments for clients who thought they had a low-risk portfolio. The century-old firm’s shares collapsed from a peak of more than £6.64 to just £0.35. It was investigated by the UK regulator and the crisis was widely expected to bring the company down if not by the size of the compensation it would have to pay out to investors then at the very least because its brand had been so utterly tarnished.  Instead, the firm merged with Standard Life in 2017 and by the end of March 2019 had grown to more than £568bn in assets under management and administration.
So for all the doom and gloom, it is still too early to write Woodford Investment Management off until the firm has actually disappeared. And that continues to be nothing any of us should wish for.